Tariffs 101

By Harold Mendelson

It seems a lot of so called knowledgeable people are upset with President Donald Trump’s imported steel and aluminum tariffs. The general viewpoint is the tariffs will start a trade war and the U.S. economy will collapse.

Is it true the tariffs will destroy our economy? Well it is true that businesses generally hate tariffs, because they drive up the cost of imported materials used to make their products. If that is so, why would President Trump want to upset the economy?

If you look at the tariffs he has imposed, you will see there’s is a vagueness to his tariffs. Mexico and Canada are exempt for the time being. Why? President Trump wants to renegotiate NAFTA. NAFTA was the brainchild of then-President Clinton. It was designed to build up free trade between the U.S. and its North American neighbors. In the past 20 years, what has it accomplished? It certainly expanded trade between the nations of North America. It also allowed American companies to move manufacturing jobs off shore, where lower labor costs reduced manufacturing costs and raised net profits. The areas around Detroit and the rest of the rust belt states were turned into ghost towns. Auto plants and steel mills shut down. Supporting industries such as logistic companies shut down as well. You can’t make steel with the coke made from coal. NAFTA was a treaty that was much more beneficial to countries outside the U.S. So what can be done to fix the the disadvantages of NAFTA so the American economy isn’t hurt by the treaty? One way is to renegotiate NAFTA. Up to this point Mexico and Canada have been slow to agree to reopen the talks. After all, both nations realize any changes made to NAFTA will hurt their their economies. So President Trump is using the tariff as a bargaining chip. The same holds true for the rest of our international trading partners, including China. Most of the treaties the U.S. has entered into since NAFTA have put the U.S. at a disadvantage. President Trump has said these treaties were bad for the U.S. and pledges to renegotiate those treaties.

As for China, it has done it’s best to promote its economy at the expense of other nations’ economies. It manipulated its currency; it has been dumping steel and aluminum on the world markets for years. Ratan Tata, an Indian billionaire who made his money in the steel and aluminum industries as well as the auto industry, a number years ago reopened steel plants in the UK. Late last year he announced he was shutting down his UK operations because of the artificially low prices of steel exported from China. President Trump instituted these tariffs to equalize the prices of steel and aluminum coming from China and others nations that have been dumping their exports on the world market. He has publicly announced the tariffs will be ended when these imbalances are eliminated, and when product dumping ends and NAFTA is renegotiated.

Why impose tariffs and risk upsetting the world recovery? Because it puts the U.S. in a position of strength and influence. At long last.